Tài chính doanh nghiệp - Chapter 4: Structure of the balance sheet and statement of cash flows

Structure of the Balance Sheet and Statement of Cash FlowsRevsine/Collins/Johnson/Mittelstaedt/Soffer: Chapter 4Learning objectivesHow balance sheet accounts are measured and classified.How balance sheet information is used.Balance sheet terminology and format outside the U.S.How notes aid your understanding of the firm’s accounting policies, subsequent events, and related-party transactions.How successive balance sheet and the income statement can be used to identify cash inflows and outflows.How the cash flow statements can be used to explain changes in successive balance sheets.The distinction between operating, investing, and financing sources and uses of cash.How changes in current asset and current liability accounts can be used to compute “cash flows from operations” from accrual earnings.Differences between IFRS and U.S. GAAP for certain items on the statement of cash flows.4-*Elements of the balance sheet Probable future economic benefits Obtained from past transactions or eventsProbable future sacrifices of economic benefits arising from present obligations to transfer assets or provide services in the future as a result of past transactions or events The residual interest in net assets.ASSETSLIABILITIESEQUITY=+How the money is investedWhere the money came from4-*Balance sheet informationLIABILITIES+EQUITYASSETSRates of returnCapital structureLiquiditySolvencyFlexibilityROA and ROCEDebt/Equity ratioCash conversionAbility to pay debtOperating and financialHelpsassessBalance Sheet4-*Balance sheet measurement conventionsLIABILITIES+EQUITYASSETSHistorical costCurrent cost (fair value)Net realizable valueDiscounted present valueMeasurementmethodsBalance Sheet4-*Balance sheet classification:Overview Current assets Property, plant and equipment Investments Other assets Current liabilities Long-term debt Other liabilities Preferred and common stock Additional paid-in capital Retained earningsASSETSLIABILITIESEQUITY=+4-*Balance sheet classification:Current assetsAmortized cost or current market valueNet realizable valueLower or (historical) cost or current market value4-*Balance sheet classification:Other assetsHistorical cost minus accumulated depreciation except that fair market value is used when “impaired”4-*Balance sheet classification:LiabilitiesAmount due at maturityHistorical costDiscounted present value4-*Balance sheet classification:Stockholders’ equityHistorical par valueHistorical costCombination of different measurement bases4-*Analytical insights:Understanding the businessWhich company is? Deere E-Trade Potomac Electric Power Wal-Mart4-*Balance sheet presentation:International differencesCurrent AssetsLong-lived AssetsCurrent LiabilitiesNon-current LiabilitiesStockholders’ EquityFixed AssetsCurrent AssetsCurrent LiabilitiesNon-current LiabilitiesCapital EmployedU.S. Format:U.K. Format:+=+++--=4-*Notes to Financial statementsNotes are an integral part of companies’ financial reports.Help users better understand and interpret the numbers presented in the body of the financial statements.Three important notes:Summary of significant accounting policies.Subsequent event disclosures.Related-party transactions4-*Statement of cash flowsExplains why a firm’s cash position changed between successive balance sheet dates. Here’s the balance sheet equation:AssetsStockholders’ equityLiabilities=+CashNon-cash assetsLiabilities=+-Stockholder’s equityΔCashΔ Stockholders’ equity=+At the same time, it explains why non-cash assets, liabilities, and stockholders’ equity have changed.Δ Non-cash assetsΔ Liabilities-4-*CashNon-cash assetsStockholders’ equityLiabilities+=+Cash flow statement formatOperating ActivitiesInvesting ActivitiesFinancing ActivitiesΔ CashCash inflows and outflows from transactions and events that affect operating incomeCash inflows and outflows from loaning money to others, investing in securities, or in assets (e.g., equipment) used to produce goods and services.Cash inflows and outflows from borrowing money, selling stock, and paying dividends4-*Cash flow statement:Wal-Mart exampleAdjustments to accrual earnings4-*Cash flow statement:Wal-Mart example4-*Cash flow versus accrual earnings:HRB Advertising CompanyOpened for business on April 1, 2014. Transactions for the year include:Herb Wilson, Robin Hansen and Barbara Reynolds each contributed $3,500 cash on April 1 for shares of the company’s common stock.HRB rented office space beginning April 1 and paid the full year’s rental of $2,000 per month, or $24,000 in advance.The company borrowed $10,000 from a bank on April 1. The principal plus accrued interest payable is payable January 1, 2015 with interest at a rate of 12% per year.HRB purchased office equipment with a five-year life for $15,000 cash on April 1. Salvage value is zero and the equipment is being depreciated using the straight-line method.HRB sold and billed customers for $65,000 of advertising services rendered between April 1 and December 31. Of this amount $20,000 was still uncollected by year end.By year-end, the company incurred and paid the following operating costs: (a) utilities, $650; (b) salaries, $36,250; and (c) supplies, $800The company had accrued (unpaid) expenses at year-end as follows: (a) utilities, $75 (b) salaries, $2,400; and (c) interest, $900.Supplies purchase on account and unpaid at year-end amounted to $50. When supplies are purchased they are charged to an asset accountSupplies inventory on hand at year-end amounted to $100.Annual depreciation on office equipment is $15,000/5 = $3,000. Because the equipment was acquired on April 1, the depreciation expense for 2014 is $3,000 x 9/12 = $2,250.Profit (accrual earnings) for the year was $3,725 but the checking account was overdrawn by $11,2004-*Here’s what happened at HRB4-*Deriving cash flows from operations:Indirect approach4-*HRB’s cash flow statement:Indirect approach4-*Deriving cash flow information:HRB one year laterBank loan refinancedStock issued4-*Deriving cash flow information:HRB’s accrual earnings4-*Deriving cash flow information:HRB’s cash flows4-*Deriving cash flow information:OverviewBeginningBalance sheetEndingBalance sheetIncomestatementCash flowstatementYou can always derive any one financial statement from information available in the other three statements.4-*Deriving cash flow information:Cash collected from customers4-*Deriving cash flow information:Salaries paid4-*Deriving cash flow information:Rent paid4-*Deriving cash flow information:Utilities paid4-*Deriving cash flow information:Cash paid for supplies4-*Deriving cash flow information:Interest paid4-*Deriving cash flow information:Office equipment cash flows4-*Deriving cash flow information:Cash receipts and disbursements4-*Global Vantage PointIFRS (IAS 7) encourages, but does not require, entities to report cash flows from operating activities using the direct method.4-*Both FASB and IASB tabled a proposal to mandate the use of the direct method for reporting operating cash flows since most computer systems aren’t set up to efficiently process the requisite dataSubtle differences between IFRS and U.S. GAAP: one is how to report cash interest from investmentsU.S. GAAP reports these as part of operating cash flowsIAS 7 allows the option to report these as cash flows from investing activitiesWhy: believed to provide information that is not available under the indirect methodGlobal Vantage PointAn example – EMC Corporation4-*Direct MethodGlobal Vantage PointAn example – EMC Corporation4-*Indirect MethodGlobal Vantage PointAn example – EMC Corporation4-*SummaryThe balance sheet shows the assets owned by a company at a given point in time, and how those assets are financed (debt vs. equity).Be alert for differences in balance sheet measurement bases, account titles, and statement format.Financial statement notes provide important information.The cash flow statement shows the change in cash for a given period, broken down into operating, investing, and financing activities.4-*Summary concludedChanges in certain balance sheet accounts help explain why operating cash flows differ from accrual income.Conversely, the cash flow statement helps to explain changes in balance sheet accountsUnderstanding the interrelationships between successive balance sheets and the statement of cash flowsUnderstanding the basic differences between IFRS and U.S. GAAP as well as differences between the direct and indirect approach to presenting cash flows from operations4-*